Trichet Signals ECB Sticking to Exit After Fed Eases

A euro sign sculpture stands in front of the European Central Bank (ECB) in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

Nov. 4 (Bloomberg) -- European Central Bank President Jean-Claude Trichet signaled the bank intends to stick to its exit
strategy even after the Federal Reserve eased policy further,
sending the euro to a 10-month high, and tensions on Europe’s
bond markets increased.

Policy makers will decide on possible further exit steps
next month, Trichet said at a press conference in Frankfurt
today after the ECB left its benchmark interest rate at a record
low of 1 percent. “The non-standard measures are by definition
temporary in nature,” he said.

The ECB’s removal of emergency stimulus is being
complicated by renewed concerns about the fiscal health of
countries like Ireland, Portugal and Greece, and by the Fed’s
move to buy another $600 billion of Treasuries to prop up the
U.S. economy. Widening bond spreads and an appreciating euro may
undermine the Europe’s economic recovery.

“One would never know that the Fed had just last night
embarked upon a radical new stimulus strategy, based on the
ECB’s statement and the answers given,” said Julian Callow,
chief European economist at Barclays Capital in London. The
ECB’s comments suggest “that the Governing Council is still
minded to plough its own furrow going forward.”

Euro Gains

The Fed’s stimulus program, aimed at stamping out deflation
risks in the world’s largest economy, sent the euro as high as
$1.4283 today. The single currency has increased 19 percent
against the dollar since early June and traded at $1.4226 at
5:33 p.m. in Frankfurt.

Trichet said he has “no reason to think” that the Fed,
the U.S. Treasury and President Barack Obama are “playing a
tactic of a weak dollar.”

The ECB’s tightening bias sets it apart from the world’s
other major central banks. The Bank of England today left its
key rate at 0.5 percent and maintained its asset-purchase
program at 200 billion pounds ($325 billion). The Bank of Japan
may announce further asset purchases of its own at noon in Tokyo
tomorrow.

The euro-area economy is showing signs of weakening after
expanding at the fastest pace in four years in the second
quarter. Expansion in the manufacturing industry has slowed from
a peak in April and unemployment climbed to a 12-year high of
10.1 percent in September. Exports from Germany, Europe’s
largest economy, declined for a second month in August.

‘Underlying Momentum’

“The underlying momentum of the recovery remains
positive,” Trichet said. Inflation pressures will “remain
contained” though risks are “slightly tilted to the upside,”
he added.

ECB policy makers from Germany, Luxembourg, Belgium,
Austria, Italy and the Netherlands have warned against keeping
interest rates too low for too long, and some have said further
exit steps may be taken in the first quarter of next year.

The ECB has committed to provide banks with unlimited
liquidity in its weekly, monthly and three-month refinancing
operations until the end of the year after abandoning its six-and 12-month loans. Next month, policy makers may decide whether
to return to a bidding process in at least some of the lending
procedures.

Bundesbank President Axel Weber has also called for an end
to the bank’s bond purchases, arguing its risks outweigh any
benefits. The ECB today bought 10-year Irish government bonds,
according to three traders with knowledge of the transactions.
In the three weeks ending Oct. 29, no purchases were completed,
according to weekly ECB notices.

Bond Purchases

The program is “not over,” Trichet said, adding that the
ECB only reports purchases after they settled. “You will see
that the program exists.”

So far, the ECB has settled purchases worth 63.5 billion
euros ($90 billion). It sterilizes their impact on money supply
by absorbing the same amount of liquidity from banks.

Investors have continued to dump Irish, Portuguese and
Greek government debt after German Chancellor Angela Merkel
stepped up her push to make bondholders share the burden of any
future bailout of a euro nation.

Irish 10-year securities fell for an eighth day, the
longest streak in two years, pushing the yield premium over
German bunds to a record of 525 basis points. Portugal’s spread
widened to 409 basis points and Greece’s reached 856 basis
points.

Trichet said that investors in Irish bonds may be calmed by
new forecasts from the government today. Irish Finance Minister
Brian Lenihan said he plans to slash the budget deficit by 6
billion euros in 2011.

“I have no reason to think that observers will be
disappointed,” Trichet said before the announcement was made.